Tagged: Emergency Fund

The thought of owing someone a debt is an uncomfortable one for most of us. When the amount owed is large, as in the case of home loans, the cognitive discomfort can be significantly greater. Additionally, the monthly financial burden of paying EMIs and housing loan interest isn’t exactly everyone’s cup of tea. To counter this, many homeowners choose to prepay their home loans.

There are multiple schools of thought when it comes to prepaying a home loan. However, there is no one-size-fits-all approach, and the decision must be made considering both financial and personal aspects.

Merely making the decision to prepay your property loan doesn’t solve your problem, though. Figuring out how to save up for prepayment is the key to succeeding without financial discomfort.

If prepaying your home loan is an option you’d like to consider, here’s a short guide on how you can make that happen.

Consider the decision

Determine whether prepayment is right for you. Home loans offer tax benefits that need to be taken into account. For instance, the housing loan interest (upper limit of Rs 2 lakh) can be deducted from taxable income. However, if your interest amount exceeds the upper limit, prepayment could save you the additional cost. Every individual’s situation is unique and should be assessed carefully before making the choice.

Fortify your backup

Get your financial safety net in place before committing to prepay the home loan. A general rule of thumb is to have the following taken care of:

• Emergency funds (medical or otherwise)

• Backup savings for EMIs and regular expenses in case of loss of employment

• Children’s education funds

• Other recurring financial liabilities

Plug the leaks

Scrutinise your financial records to identify where you tend to haemorrhage money. They usually show up in the form of unnecessary frills such as credit cards with additional privileges (that you don’t use), unused memberships (clubs, gyms and recreational establishments), loans with high-interest rates (here refinancing is an option) and so on. Eliminating these situations will improve your disposable income and thereby your savings.

Get creative

Saving up to prepay home loans can be simplified with some thought. Consider replacing your expensive forms of entertainment and recreation with creative, cost effective solutions. Tighten the purse strings as far as possible to boost your monthly savings.

Hike up the EMIs

This is a simple yet effective option. Even marginal increases in EMI payments can help reduce the principal amount. This helps reduce the tenure of the home loan. Reduced home loan tenure then results in lower total home loan interests.

Utilize windfalls

Consider partial repayments from unexpected sources of income such as bonuses, gifts from family and so on. Check with your bank regarding the number of partial repayments allowed beforehand (usually there is no such limit).

Supercharge your savings

Consider investing in a reputed mutual fund with reasonably good returns meant purely for home loan prepayment. Returns are higher than normal savings accounts while the tax payable is far lower than other forms of savings such as fixed deposits.

The choice to prepay a property loan should be made rationally and be backed by careful planning. Hasty, emotion-driven decisions could seriously hamper your overall financial wellbeing.

This article is contributed by RoofandFloor, part of KSL Digital Ventures Pvt. Ltd., from The Hindu Group

It is the time for annual appraisal letters and the bonus. Many of you might have got your tax refunds too.

While you may be happy to have some extra cash, handling it can be tricky. You need to juggle multiple aims and concerns to maximize your yearly perk. Here are suggestions for getting the most from that extra money .

OPTION 1: Reduce your debt burden
Before you start investing your surplus, pay off your debt. It could be outstanding credit card payments, car loan, personal loan, etc. Start settling your debt in the order of interest rates. The ones with no tax benefits and higher interest cost should be paid off first. Loans that offer tax benefits should be the last on your list.

OPTION 2: Invest in National Pension Scheme (NPS)
Upto Rs. 50,000 invested in the NPS, under Section 80CCD (1b), can be claimed as deduction, over and above the Rs1.5 lakh investment deduction limit under Section 80C. At the highest tax bracket of 30%, this could mean a savings of Rs 15,000 on your next tax bill. Under NPS, it is mandatory to buy an annuity plan with 40% of the corpus at maturity . The remaining 60% can be withdrawn. The Finance Minister has made withdrawals up to 40% of the corpus tax exempt, adding to NPS’ appeal.

OPTION 3: Increase equity exposure
The Sensex has fallen around 12% in the past year, and this provides an opportunity for long-term buyers. You can invest your lump sum in a debt fund and use a systematic transfer plan to move the money into equity funds. You could also earmark this corpus for a goal that is 5-10 years away. For instance, you can use the money towards increasing your down payment for an asset purchase and reduce your future loan burden.

OPTION 4: Invest for your daughter
If your daughter is less than 10 years old, Sukanya Samriddhi Yojana (SSY) is the best debt option to invest in for her future. At 8.6% yearly compounded rate, this is among the highest paying small savings schemes. Investment in SSY is tax deductible under Section 80C, and you can invest up to Rs1.5 lakh per financial year. The principal invested, the interest accumulated and the payout are all tax-free. However, you have to stay invested till your child turns 21.

OPTION 5: Build corpus to buy a house
An extra Rs. 50,000 in tax break has been introduced for first-time home buyers where loan amount is less than Rs 35 lakh and the property’s worth is not more than Rs 50 lakh. Use the bonus to increase the size of your down payment. It will bring down your loan requirement, which means lower EMIs and, if it falls below Rs 35 lakh, there’s the extra tax benefit as well. Put the bonus in an income fund if purchase is less than a year away.

OPTION 6: Build an emergency corpus
If you do not have an emergency fund, you should use your bonus to build one.You should invest the money in highly liquid options such as short-term debt funds. The corpus will help you manage sudden, unplanned expenses.

In today’s world, each one of us is constantly trying to be updated with the latest in technology, gadgets, knowledge, lifestyle etc. Competition is fierce all around us and the urge to professionally outperform always remains within us.

Everything is changing and evolving very rapidly and we are always playing catch up. But have we changed our personal financial scenario or even seriously considered doing so?

Or, are we yet walking down the same old path where regardless of what things around us are, we are still committing the same financial mistakes and ignoring the right signals in the path of our financial well being. It’s about time every individual starts to create a personal finance plan, to not only live a stress-free financial life on day-to-day basis, but also for his future money life.

Here are ten questions to ponder on and if you find yourself ticking majority of the boxes affirmatively, it is imperative that you get yourself a personal financial plan in place without much delay as these are the potential alarm signals which could spell disaster for an individual if not addressed.1. You are not sure whether your expenses exceed your monthly/annual income.2. Do you face a cash crunch every other month ?3. Do you find it difficult in repaying your personal debts and liabilities i.e. credit card dues, loan EMI’s or insurance premiums ?4. In case of any urgent monetary requirement, do you look at selling your existing investments or consider taking a loan?5. You have not been able to put your investment objectives/goals on paper.6. You feel your family will not be able to maintain the current lifestyle or achieve your goals if some unforeseen, unfortunate event were to happen to you (The sole bread earner) ?7. You do not understand the financial products in your portfolio?8. You prefer investing in only one particular asset class.9. Do you mostly invest with your friends and relatives selling financial products – who offer free advice and offer a “latest” product every time they meet you ?10. Would you like to know what amount would be your retirement corpus (after considering inflation)?

The reason for listing these 10 questions is that these are the precise pain points which most of the people encounter on a daily basis in their personal finances.

It is a complex financial jungle out there and it is natural that individuals lose their way in taking the right steps for their own good. A personal financial plan done correctly and ethically would automatically rectify the above mentioned shortcomings and clear the myths or should we say ‘cobwebs’ from the mind of an individual and put him on the path of financial well being presently and for his future. If this is put in place in an earnest and methodical manner, rest assured all your other endeavors in various aspects of your life will be in perfect alignment. What is necessary is taking the first step and start moving in the right direction.

Kalpesh Ashar is a member of The Financial Planners’ Guild, India and Founder, Full Circle Financial Planners & Advisors (a Sebi-Registered Investment Adviser)

There’s an abiding belief among Indians that the only investment that can make you rich is real estate. Such is the allure of getting rich through property that many people in their twenties and thirties want to take on a large home loan and sign up for their first apartment as soon as they receive their first pay cheque.

But if you’re in your twenties or thirties, it makes more sense to invest in equity or balanced mutual funds instead. Not convinced? Here’s why.

EMIs are compulsory savings. Without it, I will just spend the money.

The Equated Monthly Instalment (EMI) on your home loan is not an investment. It is a loan repayment where the lender earns interest off you. Let’s say you have booked a ₹50-lakh apartment and taken a 10-year home loan at 10.5 per cent to fund it. The EMI will amount to ₹67,467. At the end of 10 years, you would have paid a total of ₹80.96 lakh to the bank, of which ₹30.96 lakh will be the interest component alone!

For the apartment to be a truly good investment, it will have to generate a return over and above the ₹80.96 lakh you paid for (not the ₹50 lakh that most people assume). Instead, investing the same money in good equity or balanced funds will earn you a return on your capital, without incurring interest costs.

But I get to create an asset. With equities, after ten years, I may be left with nothing.

If this is your first home and you are actually living in it, it is not an asset at all, because it does not earn you any return. There has been no ten-year period in Indian stock market history when SIPs in equity or balanced funds have delivered nothing.

Between June 1992 and June 2002, which was among the worst ten-year periods for Indian markets, an SIP investment in an equity fund like UTI Mastershare delivered a 13 per cent annualised return. Again between September 1994 and 2004, a flattish period for the markets, SIPs in Franklin India Bluechip earned over 20 per cent CAGR.

That’s not enough. My friends say their property investments have gone up five or six-fold in the last seven years.

Translate that into compounded annual returns, and you will find that the returns aren’t much higher than that earned by good equity funds. To give you an example, Annanagar has been a booming locality in Chennai in the last ten years.

If you bought an apartment there at ₹40 lakh in 2001 (the previous real estate downturn), it is now worth ₹2.4 crore. That’s only a 13.6 per cent CAGR (compound annual growth rate). This is true across markets.

Data from the National Housing Board show that of 26 cities tracked, Chennai delivered maximum appreciation between 2007 and 2014, with the Residex for the city going up 3.55 times.

That’s a CAGR of 19.8 per cent. Markets such as Pune (241 per cent), Mumbai (233 per cent), Bhopal (229 per cent) and Ahmedabad (213 per cent) were other top ones. Their effective returns were 11.4 to 13.3 per cent.

Doing an SIP with a middle-of-the-road equity fund like the Sundaram Growth Fund for the same period would have fetched you a return of over 17 per cent; top performers would have earned you 20 per cent plus.

That’s all-India data. Some localities would have delivered bumper returns.

True, but how would you identify those localities in advance? This is the disadvantage of investing in real estate.

To make sufficient gains, you have to know not just the right state to invest in, but also the right city and locality within it. The same NHB data, for instance, shows that property prices in Hyderabad and Kochi have declined in seven years. Even in a locality, different transactions may yield different prices. To be sure, selecting the right mutual fund to invest in is difficult too. But with funds, you can invest based on the fund’s three-year, five-year or 10-year track record and can be assured that the price you are paying is right.

If you could diversify your property investments across many markets, your results would be better.

But given the large ticket sizes of property investments, most people end up betting much of their monthly pay cheque on just one piece of property. That’s concentration risk.

But I’ve never heard of anyone who became a millionaire by investing in equity funds.

Because mutual fund NAVs are available to you on a daily basis, there’s a temptation to over-trade. Most people who haven’t made money on equity funds are those who haven’t stayed on for ten years or more. They’ve bought funds, sold them and bought them again trying to time markets.

If you did the same with property investments (they have cycles too) you would lose money. Even long-term investors in equity funds invest too little in them.

A 15 or 20 per cent return from equity funds will seem small if only a fraction of your wealth is invested in it. While EMI commitments typically run into ₹30,000-₹70,000 a month, most people don’t venture beyond ₹1,000 or ₹5,000 SIPs.

We’re not recommending that you commit half or three-fourths of your monthly pay to SIPs in equity funds. But if you are in your twenties or thirties, you can certainly afford to commit 20 per cent.

Remember, once you sign up for a home loan, you can’t vary your EMI or stop paying it, if the property doesn’t appreciate or if you quit your job.

Creditvidya.com | Updated On: April 11, 2015 14:11 (IST) | NDTV Profit
If you take a quick look at your finances, it may seem like everything is in order. From a distance, your finances may appear to be devoid of any discrepancies: You have a steady income and manage to pay off your mortgage/credit card bills on time and also have that extra bit to splurge on each month. However, a closer look may reveal that you are actually making several money mistakes that may lead to disastrous consequences in the days to come.

Let’s take a look at some of these mistakes:

1) Treating home loan as just another ‘to do’ item

If you have taken a home loan, just paying EMIs on time isn’t enough. You must keep an eye on the interest rate cycles and ensure that you are in touch with your lender on a regular basis. Putting your home loan on a backburner may mean that you are missing out on big monthly savings.

2) Putting away the task of checking credit score

Most of us are guilty of some procrastination, but this is one habit that may cost you dearly. Do not wait to check and improve your Cibil score only when you are planning to apply for a crucial loan. Keeping a tab on your Cibil report from time to time to see that your financial health is in order is a good practice.

3) ‘Retirement savings can wait’

When you are young and have good prospects in your career, you may have a feeling that it is too early for you to start planning your retirement. This is, however, a crucial mistake because you are ignoring the benefits of compounding and also missing out on having the safety net of your own contributions. The later you start saving for your retirement the costlier it gets for you.

4) ‘Medical insurance is a waste’

You may be in perfect health now, but there is no saying when calamity strikes. That is exactly the reason why you need to invest in a good health plan. In case a medical emergency occurs, you may end up wiping off all your savings at one go.

5) No savings for a rainy day

When the going is good, people think that they can put away their savings for a later day. But what if there are unforeseen events in the future like a job loss or a large, unexpected expense? If you do not have a pool of savings to dip into at such times, you may end up making huge expenses on account of emergencies on your credit card. This may inflate your debt burden into an unmanageable size in the future. Making sure that you have put away at least three to six months of your monthly expenses as savings all the time is a healthy practice.

Maintaining a good financial health is as important as physical health. By keeping these five points in mind, you can ensure that your financial health is in order.

Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.

By: CreditVidya | New Delhi | April 14, 2015 5:02 pm | Financial Express
Bad financial habits getting the better of you? Do you constantly berate yourself over your money habits? Those quirks you develop sometimes can become lifetime companions paving the way to financial ruin, if not worse. If you don’t recognize bad financial habits in time, you run the risk of losing a lot of money and damaging your Cibil score in the process – a bad Cibil score means you will not have access to credit when you require it.

Here is a list that can serve you well:

1. Not budgeting your spend

A simple way to control your expenses is to start budgeting your spend. There are some mandatory payouts you need to make in a month, but what about your other expenses? Is there a scope of cutting your spend there?

When you make a budget and mark out categories there, you will find there are places that you are overspending. More often than not it is in categories such as entertainment or shopping. Tracking your expenses over time will show you the problem areas after which you should make a few conscious decisions to cut down on unnecessary expenses.

2. Going overboard with the credit card

As easy as it is to use your credit card, it may lead you into a debt trap that is not easy to get out of. Many people give into the temptation of buying things they cant afford by using their credit cards. As a result they are unable to make repayments on time. Credit cards are the most expensive form of debt as the annual percentage rate of interest on them is as high as 36-40%. Credit cards should therefore never be used to fund your desires. On the other hand, if credit cards are used judiciously each month, and repaying the outstanding amount in full, it may lead to a stellar Cibil score.

3. Dipping into emergency funds

Financial planning wisdom suggests that every person should have an emergency fund that should see him through at least three to six months. If you have created an emergency fund and dipping into it now and then, it will be of no use to you when an emergency really crops up. Therefore make it a conscious habit to put in a bit of your earnings away in an emergency fund each month. If you get a bonus or a monetary gift sometime, make sure a large share of it is directed towards this emergency fund. That is called being prepared for a rainy day!

4. Buying things to make yourself happy

There are a lot of businesses out there that are making money because you like to binge. This is not to deride the fact that India is called a “consumption” led economy, but give it a careful thought. Do you buy things to uplift your mood, or just because you are bored? If that is so, you are perhaps consuming mindlessly to make yourself content, and sorry to sound philosophical, but material things cannot buy you happiness. Do buy yourself a nice thing or two once in a while, but make it habit to save more than you spend.

5. Waking up late

As bizarre as it sounds, waking up late can also have a negative impact on your finances. Imagine the number of times you have switched off that alarm button and gone back to bed and before you know it, there’s barely enough time to get to work! Now rewind and think what would have happened if you had not hit the snooze button on your alarm. In that extra hour that you would have gotten maybe you could exercise to give your day a jump start, do some long pending reading or get started on your plans to learn a new skill.

All these activities can directly or indirectly lead to a higher income. So instead of getting that coveted hour of sleep, fill in your morning hours with these activities and guess what, you will feel more productive than ever before. And as they say, “Early to bed and early to rise, makes a man healthy, wealthy and wise!”

Bad habits are not easy to get rid off, but with a bit of hard work and conscious efforts you can indeed get rid of them, especially when they are impacting your finances. If you have empathized with one or more of the above mentioned points its time for you to make the effort now! It may be painful for you to make these changes in the immediate short term, but inculcating good financial habits over time will lead to you saving more money over time as well as maintain a healthy Cibil score.

We all develop habits that provide a rhythm or structure to our daily lives. Many of us picked up our financial habits from our parents while growing up, but the rules are no longer the same. You need to develop your financial habits to suit your lifestyle. This will help you secure your future with a good credit score.

To explain, let me take you through one story. Anand More and Mohit Gupta were childhood friends. Life took them to different paths, but they did try to meet up once in a while. Both had done reasonably well in their chosen profession. At one such reunion, Mohit mentioned to Anand that he was trying to take a home loan to but somehow his loan application was getting rejected “for no reason”. Anand, who has recently taken a home loan and had studied the matter intensely, suggested Mohit to check his credit score. Mohit applied to CIBIL for his credit report and found that his credit score was a meagre 525 whereas Anand’s credit score was a healthy 810. It’s then when Anand explained to Mohit about a collection of healthy credit habits that helped him fatten up his credit score.

Spend less that you earnNever spend money until you have earned it. (Thomas Jefferson)
Your parents and grandparents must have given this advice often enough. It’s the simple truth of being credit-wise: living within your means and spending only what you have earned. No, this does not mean that you don’t spend on credit cards or take a loan but limit the amount keeping in mind your current spending capacity. For instance, if you are taking a home loan, ensure that the loan size and EMIs that will follow are manageable and don’t end up putting you in debt.

Put credit to work but do not rely on itExpectation is the root of all evil. (William Shakespeare)
While credit card is necessary for asset building, it should be a tool in control. Credit is not cash; it is loan that has to be repaid. While shopping it is all too easy to whip out the credit card and pay. However, the fact remains that the end of the credit period is usually just a few days away.

Keep paperwork in orderI am a believer that orderliness begets wealth. (Suze Orman)
Make sure your financial information and records are organised and up-to-date. Set up alerts on your calendar to ensure that don’t miss a payment even if the bill doesn’t come on time.

Have an emergency fundBy failing to prepare you are preparing to fail. (Benjamin Franklin)
An emergency fund keeps you afloat in tough times; when there is an abnormally high demand for funds or a gap in earnings. It is like a safety net that prevents you from falling into the big, wide sea of debt. Without an emergency fund, you would fail to make your regular payments and this will result in a poor credit score.

On time, every timeThe bad news is time flies. The good news is you’re the pilot. (Michael Altshuler)
It is important to make your repayments on time; every time without any fail. Even one late repayment will have an adverse effect on your credit score. One of the easiest ways to ensure timely payments is to set up an auto debit system linking your bill payments with your credit card.

About the author: Rajiv Raj is the director and co-founder of CreditVidya.